Bulletin

Experts talk down $5 gasoline this summer

One trader says war with Iran could spike prices at the pump

By

SteveGelsi

NEW YORK (MarketWatch) — While the cost of a gallon of gasoline could possibly touch $5 for the first time this summer, at least two commodity pundits said Tuesday it’s more likely that prices will remain closer to $4 a gallon.

With oil prices on the rise and the U.S. summer driving season approaching, talk of higher prices at the pump has been buzzing commodity trading pits, said Phil Flynn of PFG Best.

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Traditionally, gasoline prices hit their loftiest levels around Memorial Day and the Fourth of July holiday weekends — a time of peak travel demand.

Flynn conceded he’s heard talk of $5 a gallon gasoline this year but said he’s not sure if retail prices will reach that level.

Currently, he said, there are two factors driving the speculation of higher gas prices: European sanctions against oil exports from Iran as well as reduced refining capacity on both side of the Atlantic.

By comparison, New York-traded West Texas intermediate crude
CL2H
has toyed with the $100-a-barrel mark in recent sessions, some $17 a barrel less than Brent.

“To get to $5-a-gallon gasoline, you’d need a geopolitical event, like a war with Iran,” Flynn said. “There’s been some panic buying of gasoline in Europe, and in Asia they’re adding to stockpiles.”

Other events on energy traders’ radar screen of traders include stricter U.S. emissions standards that could result in the closure of more American oil refineries — something that could in turn drive up prices.

Tom Kloza, director of editorial content for the Oil Price Information Service, said he thinks that gasoline prices could briefly approach the record of $4.11 at the pump set in 2008 but that the average summer driving price is likely to be less frothy — in a range of $3.75 to $4.25 a gallon.

Reuters

War jitters have gripped the energy pits, sparked in part by war games conducted by Iran near the Strait of Hormuz recently.

“A $5-per-gallon prediction is not based on fundamentals or the physics of electronic trading, but instead, on the desire (by traders) to be noticed,” Kloza said.

At last check, regular unleaded retailed at an average price of $3.51 a gallon, up from $3.13 a gallon a year ago, according to the AAA Daily Fuel Gauge Report. Broken down by state, prices averaged as much as $3.85 in California and as little as $3.02 a gallon in Wyoming.

“By late May, I believe you’ll see plenty of gasoline production from U.S. refineries, and crude-oil prices should cool,” Kloza said.

So far in 2012, he noted, gasoline consumption is down 5% to 6% from 2011, meaning prices of $4 a gallon or more would inspire much more in the way of demand destruction.

‘Record speculative skew’

About $11 billion more speculative money from hedge funds and other commodity players is currently bet on a higher price outcome on gasoline than on a lower price outcome, Kloza said.

“This is a record speculative skew, and it may indicate that most of the buyers are already on the bandwagon,” he said. “When some of them lose their patience, they may bail and prices will ease.”

The U.S. spent about $481 billion on gasoline in 2011. At $4.50 a gallon, Kloza estimates that demand would fall to about 8.5 million barrels a day, but gasoline would still cost Americans a combined $586 billion.

He also noted that higher gas prices could have the effect of accelerating the move toward electric cars — and lower demand for petroleum-based fuels.

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